An asset that was purchased 2 years ago was expected to be kept in service for its projected life of 5 years, but a new version (the challenger) of this asset promises to be more efficient and have lower operating costs. You have been asked to figure out if it would be more economically attractive to replace the defender now or keep it for 3 more years as originally planned. The defender had a first cost of $300,000, but its market value now is only $150,000. It has operating expenses of $120,000 per year and no estimated salvage value after 3 more years. To simplify calculations for this problem only, assume that SL depreciation was charged at $60,000 per year and that it will continue at that rate for the next 3 years. The challenger will cost $420,000, will have no salvage value after its 3-year life, will have chargeable expenses of $30,000 per year, and will be depreciated at $140,000 per year (again, using SL depreciation for simplicity in this case). Assume the company's effective tax rate is 35%, and its after-tax MARR is 15% per year.

(a) Determine the CFAT in year 0 for the challenger and defender.

(b) Determine the CFAT in years 1 through 3 for the challenger and defender.

(c) Conduct an AW evaluation to determine if the defender should be kept for 3 more years or replaced now.